Protecting your retirement savings from creditors

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Estate planning and asset protection go hand-in-hand. After all, no matter how well your estate plan is designed, it won’t do much good if you have no wealth to share with your family. If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims.

Most employer-sponsored plans are protected against creditors’ claims, both in and out of bankruptcy, by ERISA. IRA-based employer plans are protected in bankruptcy, but there’s some uncertainty over whether they’re protected outside of bankruptcy.

The level of asset protection available for other IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In bankruptcy, creditor protection is governed by federal law. Both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million.

The IRA limit doesn’t, however, apply to amounts rolled over from most employer-sponsored plans — or to any earnings on those amounts. To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Outside bankruptcy, the protection afforded an IRA depends on state law.

If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us.